Tren Griffin+ Your Authors @trengriffin I work for Microsoft. Previously I was a partner at Eagle River, a private equity firm established by Craig McCaw. I am on the board of directors of Kymeta. Oct. 17, 2019 3 min read + Your Authors

Whenever you read or hear the phrase "losing money" you should ask yourself: what does this person mean?

1. GAAP earnings?
2. Cash flow?
3. Unit economics?

The phrase is so unspecific that it should not be used unless money in physical form is lost. 

"investors have grown wary of cash-burning companies"

Is Airbnb really "burning cash" given:

"Airbnb has over $3B in cash on its balance sheet as of Thursday [and] also has a $1B line of credit that it hasn’t used."

Revenue isn't profit, isn't cash flow, isn't GAAP earnings!

Airbnb could be cash flow positive and yet have a GAAP loss. Or not.

Airbnb could have positive unit economics and yet have a GAAP loss. Or not.

It depends. The only thing known for sure is that the phrase "losing money" has negative value. Avoid and be wary when it is used.

4/ 25iQuiz: What is the three letter acronym that describes this spending?

"sales and marketing investments rose 58% year over year to $367M in the first quarter and marketing spend is expected to come in above the $1.1B spent in 2018"

Clue: It starts and ends with "C."

5/ Airbnb is said by sources to have:

"Q1 2018 implied gross margin: 68.75%."

If you know gross margin and that three letter acronym that starts/ends with C, what else do you need to calculate unit economics? Can you do this even if not a subscription? 

6/ "Airbnb has been 'cumulatively' free cash flow positive for some time."

Wait! Is that "burning cash"? Is that "losing money"? What about value for shareholders, which is, as you know, the actual financial objective.

Emergency 25iQ explainer to follow in due course.

7/ John Malone:

"There is a big difference between creating wealth and reporting income.” “It’s not about earnings, it’s about wealth creation and levered cash-flow growth.”

Jeff Bezos:

“It’s the absolute dollar free cash flow per share that you want to maximize."

8/ “Wait!” say some people. “What about earnings? What about profit?”

John Burr Williams: "Earnings are only a means to an end, and the means should not be mistaken for the end. A stock is worth only what you get out of it."

Rza: CREAM- "Cash Rules Everything Around Me!"

9/ Buffett: "The value of any stock, bond, or business today is determined by the cash inflows and outflows—discounted at an appropriate interest rate—that can be expected to occur during the remaining life of the asset.”

Net cash expected in the future. CREAM. DCF not DCE.

10/ Mauboussin/Rappaport: “Stock prices reflect transactions between investors willing to sell the present value of a company’s expected cash flows and buyers who are betting on higher cash flows in the future. Cash flow is how the market values stocks.” 

11/ "Successful capital allocation means converting inputs, including money, things, ideas, and people, into something more valuable than they would be otherwise. The net present value (NPV) test is … simple, appropriate and classic." Mauboussin 

12/ How should Airbnb be valued in the long term? Just like any business. "Expected long-term cash flows, discounted by the cost of capital—not reported earnings— will determine stock prices." 

p.s., Rappaport: "Cash is a fact, profit is an opinion."

P.S., At least two follow up 25iQ Tweetstorms are needed in light of this emergency thread.

1. Unit economics: value of a business expressed on a per unit basis.

2. Capital allocation: converting inputs, including money, ideas and people, into the best possible opportunity.

You can follow @trengriffin.


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